I’ve mentioned CD ladders as good options for tax refunds and emergency funds. They’re a safe way to earn a bit more in interest than the basic savings account. Currently, you won’t earn significantly more, but in the past I’ve seen CD rates go as high as 7% on a 5-year CD.

What is a CD Ladder?
Basically a CD ladder is five CDs, each with different maturity dates. Traditionally, the maturity dates are 1, 2, 3, 4, and 5 years. You buy them all at the same time. Then, when the 1-year CD matures, you roll it over into a new 5-year CD. After 5 years, you’ll have 5 CDs with the highest possible rate at the time of purchase, and you’ll always have a CD maturing within the next 12 months in case you need the funds.

Where Can I Create a CD Ladder?
Most banks offer CDs, so choose any bank or credit union. It’s best to get them all from the same bank or credit union to avoid future confusion. Before choosing a bank, read the reviews to make sure they don’t have issues with properly informing you about CD maturity. If you don’t notify them of your intention within the designated time period after maturity, they’ll automatically renew it into a CD with the same term.

Potential CD Ladder Earnings
Here’s an example of the interest you could earn with a CD ladder vs. a traditional savings account. We’ll start with $1,000 CDs. You may need more than this to open a CD at some banks, but it’s a nice round number for calculations. If you have a significant amount of money to invest, you can buy jumbo CDs, which have higher interest rates. These are Everbank rates. Even though I no longer love the bank, they have all the rates on their website, and they’re pretty generous.

1-year CD – $1,000 – 1.39%
2-year CD – $1,000 – 1.85%
3-year CD – $1,000 – 2.27%
4-year CD – $1,000 – 2.78%
5-year CD – $1,000 – 3.30%

After 5 years, you’ll have earned $768.40 in interest vs. $360 from a standard savings account. Of course, this assumes that interest rates won’t rise in the next five years. They will, because they move with the Fed rate, but CD rates will also rise with the Fed rate, so you’re renewed 5-year CD will earn substantially more than a savings account.

Of course, the more you can start with, the more you’ll earn. If you’re just starting, shoot for $10,000 total. Then, as each CD matures, consider adding more funds to each CD until eventually you have $25,000 in a CD ladder. The money is safe, it can be used for emergencies, and it’s earning a decent return.

Comments

One Response to “What Is a CD Ladder?”

  1. CD Ladder Explanation : : cd on April 20th, 2010 4:42 am

    [...] Zobacz resztę artykułu: CD Ladder Explanation [...]

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